Finance Lease Vs Hire Purchase

A question we get asked all the time is what’s the difference between a finance lease and hire purchase? Hopefully this article will help clarify the difference.

Why do companies use asset finance?

Every business involves a degree of financial planning for capital purchases, and in the haulage industry the capital purchases tend to be costly. So in order to maintain a healthy cash flow, companies tend to spread the cost of their purchases over a period of time to match the commitment with the revenue generated. This makes the payments more manageable without impacting the cash flow.

A finance lease and hire purchase are both options for financing assets over a fixed period. Both options vary from each other in many ways such as ownership of the asset, depreciation, rental payments and the tax impact.

LEASE

A finance lease is where the finance company purchase the asset and the ‘lease’ it to you for a pixed period at a fixed monthly rental. You pay the agreed initial rental followed by fixed monthly rentals for a fixed period. Ideal when ownership is not required.

90% of all deals written by Lease Finance Limited are a finance lease.

Key features of a finance lease

  • Conserves cash flow by paying by instalments
  • Low upfront costs as the VAT is spread across the life of the agreement
  • Fixed monthly repayments
  • The monthly rentals can normally be offset against taxable profits
  • At the end of the finance lease you can continue to rent the asset by paying an annual (peppercorn) rental or sell the goods to a third party and retain up to 99% of the sale proceeds

HIRE PURCHASE

You pay the agreed deposit, VAT on the full purchase price and then finance the balance over a suitable period with fixed monthly payments. A balloon or final lump sum can be applied to the back end of the agreement to reduce the monthly repayment.

A hire purchase agreement offers outright ownership of the asset at the end of the agreement.

Key features of hire purchase

  • Conserves cash flow by paying by instalments
  • Businesses can offset interest payments against taxable profits
  • We can tailor the agreement to suit your business requirements
  • Fixed monthly payments
2017-10-10T10:33:07+00:00

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